What's Wrong With the Auto Industry?

So the big news of the day is Rick Wagoner was forced out of GM. Of course GM and Chrysler are both in a big pickle and it's a very complicated problem.

But the fundamental issue is that they are not really in business. They are cash-devouring problems that the US government now control and support. I view this move as Washington asserting its grip and making an example of current/past management. But that's not going to solve what's wrong with the industry.

First and foremost the problem with the auto industry is poor management. Management that does not understand automobiles.
Cars are not widgets nor are they commodities. Consequently they cannot be treated as such. If they were there would not be nearly as much variety nor emotional attachment to them. They are not just "needs" but they are to a large extent "wants".

Is it coincidence that the two companies in most trouble now are not run by engineers? Did you know that Honda, Daimler, VW, Nissan/Renault, BMW, and Ford (don't need Uncle Sam's money at the moment) are all headed by engineers? Toyota is one of the major exceptions. But incoming CEO Akio Toyoda is a diehard car enthusiast. The management at these companies have a keen understanding of automobiles and what their customers want.

Secondly, it is again poor management in the larger sense. No long term strategy. How many reorganizations and reshufflings have GM and Chrysler announced over the years? How many times have those companies said the next time they'll get it right? How many times have they exchanged one ill-conceived strategy for another mid-stream? More times than a cat has lives. They have never had any viable long term strategy and then properly executed it. It's always one quarter to the next.

Thirdly, they depended too much on the availability of easy credit (so did the economy as a whole) for people who were not creditworthy. In other words, the market for automobiles was smaller than it appeared, which further exacerbates the problem of overcapacity now that the market has shrunk.

Lastly, it is ineffective and counterproductive government regulations that have contributed to the mess. Healthcare costs are a part of it. Labor unions another (and they are getting more sway with card check). CAFE (Corporate Average Fuel Economy) on the surface doesn't seem too bad. But today's 262 page final rule for Model Year 2011 is full of errors and poor assumptions (more on that later).

So the question now is how can these two companies turn out good product when they're worried about going under in a matter of days? The answer is that they can't.

And that's why any pretension that GM and Chrysler are businesses should be put to rest. Business implies profits. And any hope that these organizations will ever turn one again is pretty slim. They should be allowed to go bankrupt and reorganize or dissolved. Throwing good money after bad is not the solution. Nor is a government task force or nationalizing these companies going to solve any more problems in the long run.